Investment Management in International Business 2

8/3/2019 Investment Management in International Business 2

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International BusinessModule - 3

Prof. Rakhi R. Shrivastava

Date: 08.09.2011

INVESTMENT MANAGEMENT IN INTERNATIONAL BUSINESS


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Sub Topics to be covered

1. Foreign Direct Investment2. Offshore Banking

3. Foreign Exchange Dealings and Numerical in

Business4. Resource Mobilization through Portfolio/ GDR /

ADR

5. Other options of funding in ventures and casediscussion


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Foreign Direct Investment ( meaning)

Case of Toyota:

1.Toyota originally used to export cars to USA.Government of the United States of Americaimposed tariff on cars imported resulting inincrease in Toyota car prices by 200%. Then the

US customers found that cars manufactured inthe USA were cheaper than the imported cars,the sale of domestic cars went high and the

demand for Toyota cars declined drastically.Looking at this, Toyota adopted the strategy oflocating its manufacturing plant in the USA by

direct investment.


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1.Case of Bridge Stone

2.Bridgestone Tyre Company, a Japanese MNC is the Worlds largest manufacturer of rubberproducts. Bridgestone decided to diversifygeographically because its management believed

its competitive advantage was more specific tothe production of tyres. Then it adopted thestrategy of direct investment in some countries

including the USA. It purchased Firestones tyreoperations. This deal gave Bridgestone five NorthAmerican plants, which supplied 40% of the tyres

for North American vehicles, built by Ford and


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1. Case of Bridge Stone

2. The USA govt. imposed restrictions on tyreimports

3. Bridgestone had a bitter experience oflicensing strategy from Goodyear on licenseagreement, which enable the former to gain thetechnical knowledge of the latter and use thisfor its competitive advantage. As such

Goodyear terminated the contract withBridgestone.

4. Bridgestone favored locating in growth markets

in order to consolidate in the industry.


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Meaning of FDI

Companies invest in foreign countries inorder to gain control over the market andthereby increase sales. Market control is

possible by establishing control ofmanagerial decision making via investment inequity share capital.

The investment made by a company in

new manufacturing or marketing facilitiesin a foreign country is referred to asForeign Direct Investment Investmentmade by Enron in Power plant in India isan example of FDI.

FDI is defined as an investment involving a longterm relationship and reflecting a lasting interestand control by a resident enterprise (foreign directinvestor or parent enterprise) in one economy inan enterprise (FDI enterprise or affiliate enterprise

or foreign affiliate) residents in an economy otherthan that of the foreign direct investor.


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Forms of FDI

1. Purchase of existingassets in a foreign

country

2. New investment inproperty, plant and

equipment

3. Participation in a jointventure with a local

partner.

4. Transfer of manytypes of assets likehuman resources,

systems,technological

knowhow in exchangefor equity in foreigncompanies. For eg:

Westin Hotelstransferred

reservation systems,managers and cost

control systems.

5. Export of goods forequity- This method

may not be used at the

initial stage of theestablishment of thebusiness.

5. Thru trading in

Equity: investment inthe equity of foreigncompanies by

purchasing the equityshares of a foreign

company.

For example, KLM ofNetherlands acquired

the equity of northwestAirlines of USA by

giving the KLM equityshares to the Northwest

Airlines Owners.


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Theories of FDI

Product Life Cycle

Theory

Factor Mobility

Theory

Internalization Theory(Buckley and Casson

(1976)

Ownershipadvantage Theory

Theories ofFDI

O hi Ad t


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Ownership Advantages

Innovation Brand names

Managerial andorganizational skills

Access toinformation

Financial or naturalResources

Size and networkadvantages. These are being

exploited abroad or

wish to augmentthrough foreign

Also knownas firm

specificcompetitive

strengthsof TNCs:

L ti Ad t


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Location Advantages

The location factors of a host country is the keydeterminant to its relative attractiveness as an

investment destination. They reflect primarilyeconomic factors conducive to the production ofdifferent goods and services in the name andhost economies. The major country specific

advantages can be as follows:

Relativemarket size

Productionor

transportation costs

SkillsSupplychains

Infrastructure

Technologysupply


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Collaboration of both

Driven by the competitive pressures of

globalization of world economy. Both thesefactors work together and lead a firm to investabroad by establishing foreign affiliates. These

affiliates then become a source of competitivestrength for their respective corporate networks.


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Theories of FDI

DunningsEclectic Theory(OLI Paradigm)

Currency based

Approaches

Location specific

Theory

IndustrialOrganization

Theory

Theories ofFDI

F i fl i FDI


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Factors influencing FDI

Factors influencing FDI are of three categories,:

Supply Factors

Production cost Logistics Resource Availability Access to technology

Demand factors

Customer access Marketing advantages Exploitation of competitive

advantage

Customer mobility

Political factors1. Avoidance of trade barriers

2. Economic Developmentincentives


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Reasons for FDI1. To increase sales and profits

2. To enter fast growing Markets

3. To reduce costs

4. To consolidate Trade blocs

5. To protect domestic markets6. To protect foreign markets

7. To acquire technological and

managerial know-how

T f FDI


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Types of FDI

On theBasis ofDirectionof Control

Inward FDI

Outward FDI

In the basisof type ofactivity

HorizontalFDI

Vertical FDI

In the basisof

investmentobjectives

Resourceseeking FDI

Marketseeking FDI

EfficiencySeeking FDI

On thebasis of

entrymodes

GreenfieldInvestments

Mergers andAcquisitions

On thebasis ofsector

IndustrialFDI

NonIndustrial

FDI

On thebasis ofstrategicModes

Exportreplacement

Exportplatforms

Domesticsubstitution


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Why FDI when other means are available?

Limitations of exporting

High costs of transportation, shipment andtransshipment

High costs of tariffs and other forms oftrade barriers

Low value of weight products like softdrinks and cement can be produced at anyplace, similarly some of the costlier goodscan also be produced easily at any place.

.

Wh FDI h th il bl ?


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Why FDI when other means are available?Limitations of Licensing

Foreign collaborator may become potential

competitor in the future.

No tight control by licensor firm over thelicensees manufacturing, marketing and other

strategies and profitability in the foreign country.The firm with competitive advantage in productsand technology only can go for licensing.

Toyotas competitive advantage is mostly due toits superior ability in product designing,engineering manufacturing and marketing

automobiles. Thus it has management

B fit d C t f FDI


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Benefits and Costs of FDIBenefits to Home Country

Inflow of foreign currencies in the form ofdividend, interest, royalty and technical servicefees. Nissans profile repatriated to Japan arefrom its FDI in the UK. They helped Japan in BOP

equilibrium.FDI increases export of machinery, equipment,technology etc. from the home country(parent

company) to host country (subsidiary Co.). This inturn enhances the industrial activity of the homecountry. The parent company gains access to

new financial markets through investment abroad.

B fit d C t f FDI


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Benefits and Costs of FDI

Costs to Home Country:

The cost accruing to Home country is no doubtless but investment abroad takes away capital,skilled manpower and managerial professionalsform the country. Sometimes this outflow of

factors of production is so large that it hampersthe home countrys progress.

Current account position of the home country

suffers as FDI is a substitute for Direct exports.MNCs operate in different countries and adoptvarious techniques to maximize their profit. This

leads a tussle between host and home country


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Benefits to Host Country Availability of scarce factors of

production

Improvement in Balance of payments Building of Economic and Social

Infrastructure

Fostering of Economic Linkages

Strengthening Government Budget

Access to better technology

Increased competition


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Costs to Host Country Intensifying Competition

Negative Effects on the Balance of payments

Repatriation of Dividends by ForeignCompanies

National Sovereignty and Autonomy.

Crowding out and unemployment effects Technology dependence

Profit outflow

Corru tion


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Trends in FDI Country wise

analysis and of India Kindly search statistics regarding

recent trends in FDI.

Find out other collaborative strategiesfor International Business.

Patterns of FDI


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Patterns of FDI

The amount of FDIundertaken over a

given time period (for example for ayear) is termed as theflow of FDI.

If the investment is madeby a foreign firm in a

country, it is termed asinflow of FDI where asinvestment made

overseas is termed asoutflow of FDI.

The total

accumulated valueof Foreign ownedassets at a giventime is termed as

stock of FDI.

C t f FDI Fl


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Components of FDI Flows

FDI is mainly financed by MNEs through or itcomprises of:

Equity Capital ( largest component among allfinancing).

Intra company loans

Reinvested earnings

Its world wide share in total world FDI inflowsfluctuated between 58% and 71% during 19952004. The intra company loans accounted for23%. The reinvested earnings fluctuated for12% of the world FDI inflows during the same

period. The other two components were also

FDI performance Indices


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FDI performance IndicesFor carrying out cross country comparison of FDIperformance and FDI potential, the UNCTADs

FDI performance and potential indices serve asuseful tools.

Inward FDI Performance Index

It is a measure of the extent to which a hosteconomy receives inward FDI compared to therelative size of its economy. It is calculated as the

ratio of a countrys share in global FDI inflows toits share in global GDP.

Where:

INDi = The inward FDI performance index of the ith

wi

wi

i

GDPGDP

FDIFDIIND

/

/

FDI performance Indices FDIFDI /


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FDI performance IndicesWhere:

INDi = The inward FDI performance index of the

ith country

FDIi = The FDI inflows of the ith country

FDIw= World FDI inflow

GDPi = GDP in the ith country

GDPw = World GDP

A value greater than one indicates that thecountry receives more FDI compared to itsrelative economic size, a value below one that itreceives less, a negative value means thatforei n investors disinvest in that eriod.

wi

wi

i

GDPGDP

FDIFDIIND

/

/



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Outward FDI Performance Index: performancein FDI outflows relating to the size of economies

is measured by outward FDI performance index.It is calculated as the ratio of a countrys share in

global FDI outflows to its share in the world GDP.

Where:

ONDi = The outward FDI performance index of

the ith countryFDIi = The FDI outflows in the ith country

FDIw = World FDI outflows

GDP in the ith Countr

wi

wii

GDPGDP

FDIFDIOND

/

/


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The difference in the index values

among countries reflect differences inthese two sets of factors determiningoutward FDI by Transnational

companies head quartered in differentcountries.

Policy Framework to promote Foreign Direct


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Policy Framework to promote Foreign DirectInvestmentAttracting FDI has become a key part of national

development strategies for most countries. Suchinvestments are often viewed to augmentdomestic capital employment and productivity

leading to economic growth.Despite its positive effects, FDI is also blamedfor crowding out domestic investments and

lowering certain regulatory standards. The impactof FDI depends on many conditions. Howeverwell developed and implemented policies canhelp maximize gains from FDI.


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Policy Framework to promote

Foreign Direct Investment Investment Promotion: it is done

through three different generationpolicies:

First generation Policy

Second generation Policy Third generation Policy

Major Regulatory and Incentive Measures to


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Major Regulatory and Incentive Measures toencourage FDI

Closure of certain sectors,

industries or activities to FDI Minimum Capital Requirements Restriction on Modes of Entry Eligibility for bidding on

privatization Establishment of special Zones for

FDI with legislation distinct formthat governing rest of the country.

1. Screening,Admission

andestablishment

Reduction in standard corporateincome tax rates

Tax holidays Reductions in social security

contributions Accelerated depreciation allowances Duty exemptions and drawbacks Export tax exemptions

Reduced taxes for expatriates

2. FiscalIncentives



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3. Financial IncentivesInvestment

grants

SubsidizedCredits

CreditGuarantees

4. Other IncentivesSubsidizedservice fees

(electricity,water,telecommunications,transportationetc.

Subsidized

designatedinfrastructure such ascommercialbuildings

Preferenceaccess togovernmentcontracts

Closure ofthe marketto furtherentry orgranting ofmonopolyrights



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5.PerformanceRequirements

Protection from

importcompetition Local Content

requirement(value added)

Minimum exportshares

Trade balancing Technology

Transfer

Local equityparticipation

Employmenttargets

R&DRequirements

Promotion of FDI in India


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Institutional framework:

DIPP is responsible for facilitating and promoting

FDI inflows into the country. It works as advisorybody for potential investors on

Investment policies, procedures and opportunities

Resolution of problems faced by foreign investorsthrough foreign Investment ImplementationAuthority (FIIA) which interacts directly with the

investorsMinistry of Finance

Ministry of External Affairs

Ministr of labour


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Policy framework: This evolved in a phased manner from import

substitution soon after independence to

progressive libralisation in 1990. The GOI ispromoting FDI through by:

Setting up Special Economic Zones

Technological up gradation of Indian industrythrough Greenfield operations investments inmanufacturing and in projects with highemployment potential are encouraged.



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Promotion of FDI in IndiaThe FDI policy of India is as follows:

FDI prohibited

Retail trading (except single brand productretailing)

Atomic Energy

Lottery Business

Gambling and betting sector

Business of Chit Fund and nidhi companyPlantation except tea

Trading in Transferable development Rights

(TDR)

Promotion of FDI in India: FDI Policy of India


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The FDI policy of India is as follows:

FDI upto 24% allowedManufacturing of items reserved for

small sector upto 24% above which prior

government approval is required FDI upto 26% allowed

FM Broadcasting

Defence productionInsurance

Publishing of news papers and

periodicals

Promotion of FDI in India: FDI Policy of India:


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Promotion of FDI in India: FDI Policy of India:FDI upto 49% allowed

Broadcasting

Scheduled air transport services under theautomatic route.

Commodity exchanges with prior governmentapproval

Credit information companies with priorgovernment approval

Refining in case of PSUs with prior governmentapproval

Asset reconstruction companies with priorovernment a roval

Promotion of FDI in India: FDI


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Promotion of FDI in India: FDIPolicy of India

100% FDI with prior governmentapproval subject to conditions:

Trading

Courier Services Tea Sector, including tea plantation

Cigar and Cigarettes manufacture

Investing companies ininfrastructure/ Service sector

Publishing of Scientific magazines,

specialty journals and periodicals



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100% FDI under automatic route

Agriculture Sector

Industrial sector

Mining

Manufacturing activities Petroleum Sector

Power

Special Economic Zones Industrial parks

Construction Development Projects

Services

Sub-Topic: 2 Offshore Banking


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Sub Topic: 2 Offshore Banking

All over the world, the business community is in

search of location where there investments are

Safe

Can be taken out without any restrictions

Can be invested comfortably for any venture any

where in the world.

For such kind of smooth transactions of funds across

the globe, the emergence of off shore banking has

been an important evolution in International Business.

It is a hassle free and safer banking system for the

purpose of saving and borrowing funds for business

operations.

Sub-Topic: 2 Offshore Banking cont


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The purpose of Off-shore banking is to provideinternational Business firms funds at a reasonable cost,

at the right place and at the right time.

Currently, Mauritius, Malta, Panama, mans Island,Cyprus and Hawaii are the locations attracting off

shore Banking.

India has permitted banks to set up off -shore banking

operations in SEZ.

Sub-Topic: 2 Offshore Banking....cont.....

Off h B ki M i


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Offshore Banking: Meaning

Off-shore Banks are the banking units set up by

foreign banks in territories where the restrictions and

regulations are limited and there is very less

intervention by the host country.

These banks bring foreign currency funds from non

residents and the international money market and

invest them in the host country or in the projects set

up by host country in a third country.

How were these Offshore Banking


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How were these Offshore BankingUnits established?

The origin of OSBU is due to growing financingactivities in taxhavens.

A tax haven is a place where non residents canreceive income or own assets with out paying

high taxes. These places are found in:

Panama

Switzerland

Bahamas

Hongkong

Netherlands

How were these Offshore Banking Units established?


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g

Some features ofTaxHavens are:

Low rate or complete absence from income tax on

foreign investments and income.High degree of political and economic stability and a

political system that encourages business activity.

Strict and well enforced rules of banking secrecy.

Absence of exchange control

Availability of supporting infrastructure, such as an

efficient communications and transportation network.

Presence of well developed legal system and

professional accounting expertise

Confidence of investors due to ast credential.

How were these Offshore Banking Units


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ow we e t ese O s o e a g U tsestablished?

These features of Tax Havens encourage

many type of business operations , some of

which are bonafide operations but most of

which generate dirty offshore funds.

Offshore Banking : Its Operations


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g p

It is a part of foreign currency market.

Main operating function of offshore banking units is

foreign currency transactions in the form of theacceptance and placement of funds in foreign currency

outside the country of issue.

The issuance and placement of foreign currencycertificates of deposits, loan/credits and bonds.

Offshore banking is typically carried out through

establishments that are offshore branches.Offshore banks are legally indistinguishable from

parent bank s on shore which facilitates intra-branch

transfers.

Offshore Banking : Its Operations.... Cont...


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It is engaged only in three types oftransactions:

Foreign currency loans and deposits

(constitutes the bulk of off-shoretransactions)

The underwriting of bonds

Over the Counter trading in derivatives

for risk management and speculative

purposes

Offshore Banking : Its Operations.... Cont...

Offshore Banking:Contribution to the


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O s o e a g Co t but o to t edevelopment of Host Country By Raising foreign currency loans and bonds for the

host country at reasonable interest rates due to theirconnections with well known international banks.

Better access to international capital markets by host

country. Contribution to foreign exchange income of the host

country through local operating expenditures

Advanced system of communication and transportnetwork.

Improvement in Host country banking industry due

to competition

Offshore Banking


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O s o e a gOFCs in Developed Countries

Disappearing distinction between onshore andoffshore banking in industrialized countries dueto wide acceptance of capital accountconvertibility.

OFC in Asia in 1968 when Singapore launchedAsian Dollar market and introduced the AsianCurrency Units.(ADM as alternative to London

Eurodollar market for the investment of oilsurpluses from Indonesia and Malaysia.

Japan- Japan offshore market

Documents

Investment Management in International Business 2